Restoring BEC in its 75th year

Photo by Randi Szabo Calling it a bailout, Montana Public Service Commissioner Travis Kavulla railed against the Southern bankruptcy trustee’s proposal to make rural utility co-op members bear all risks for giant creditors at the Beartooth Electric Cooperative annual meeting in Roberts.

By

Eleanor Guerrero CCN Senior Reporter

The annual meeting of the Beartooth Electric Cooperative’s (BEC) was held Saturday, Sept. 28, at Yellowstone Dog Sports in Roberts. President Roxy Melton came out strong on BEC’s 75th anniversary. “The co-op returns to the tradition of membership control. We don’t believe that providing our own energy is necessary.” Her comments reflected on the previous board’s decision as a member of Southern Montana Electric Generation and Transmission Cooperative, Inc.(Southern) to build its own power plant, the Highwood Generating Station (HGS). HGS cost $85 million dollars, but a report filed finds no current value for the plant. Only $1.18 million is valued for the land. HGS contributed to the ongoing and contentious Southern bankruptcy. Melton assured members, “Contrary to what the trustee said if we liquidate Southern, the lights will not go out.”

“The restoration of Beartooth began,” said Melton, “with the election of seven new board members” and “getting members’ questions answered as fast and honestly as possible.” The current board saved the co-op almost $300,000. There were also $3.5 million in HGS write offs, plus about $500K in aging investments in Wyoming in a project not planned for completion and a million dollars in capital credits for investments in HGS. There was much more to report to members. BEC Board member Arleen Boyd announced that last week an adversarial lawsuit was filed in the bankruptcy by the four remaining co-ops, BEC, Fergus Electric Cooperative Inc., Mid-Yellowstone Electric Cooperative, Inc. and Tongue River Electric Cooperative, Inc. against Southern. Keynote speaker Montana Public Service Commissioner Travis Kavulla, an outspoken opponent of Southern said, “It’s extremely strange.

The people who will be running the company in a Chapter 11 Bankruptcy (the cooperatives) oppose the reorganization.” In reviewing Southern’s history Kavulla reflected, “Utilities have a monopoly but you never have a monopoly on stupidity.” He blamed bad decisions, lack of corporate oversight and egos. “They wanted to be power marketers like Morgan Stanley which is backed by big corporations and controls millions if not billions,” he said. “They don’t appear to be competent managers. I wouldn’t hire them to run a power company if I owned a power company.” “They should have known in ’07,” he said sharply. “There were no great needs, and opportunity to pull back.” Instead, “ego got involved.” Southern doubled down, signed to buy more power from PPL and had to sell it back to what turned out to be a suppressed market. He called Beartooth “incredibly naïve” and said Prudential knew it was an “almost not possible” deal for Southern. “This was a business model set up to fail” but Kavulla said there were no checks, “only a small group of yes men.” When the plant was reduced from a 250 MW coal plant to 46 MW gas (postponing expansion to the 120 MW goal) he said that was another indication to management “something was wrong. The bottom line was no one needed the plant.” Another bad decision was financing. “Did they look to Montana for the $7 million? No, they looked to Wall Street-Prudential at 8 percent interest.” Other co-ops were paying 3-5 percent. He said the reorganization would not solve the problem. “It is extraordinarily high risk. If the lenders don’t bear the risk, then something is dramatically wrong.” He compared it to a bailout. “We use the ‘used and useful’ rule in the commission,” he explained. “The court should be a surrogate for this purpose. A clean break needs to be made with Southern. Lenders need to bear the burden.” He distributed a chart showing rates proposed that are now twice the market rate, highest in the state. Boyd commented, “I first ran for the board because the numbers didn’t add up. Important information was far too difficult to get. There is no value, but three co-ops are bound with up to $100 million in debt-and that’s just the secured debt.” Melton and Boyd were reelected. Members voted to approve by-law amendments including requiring member notice for: increasing rates, long- term power contracts or selling or leasing substantial property. Officer term limits were set. Boyd said current rates are not sustainable. BEC disagrees with the proposed bankruptcy rate plan. Kavulla said, “Hopefully with upcoming expert testimony there will be a reality check.” BEC and Kavulla requested Southern’s financial audit but have not received the public document. Less than 11,000 rural members exist in the co-ops remaining in Southern.

The court released Yellowstone Valley Electric Cooperative, Inc. (Yellowstone) and the City of Great Falls (35 percent of Southern’s revenue) from Southern. Kavulla blasted the “grandiose schemes” such as HGS and the $330 million PPL contract to buy excess power. Kevin Owens, the second keynote speaker and BEC member, has been coming to Red Lodge for 42 years. He is General Manager of the Columbia River People’s Utility District. He declared co-ops like Southern “lost sight of who they are-a small rural electric co-op.” He gave examples of similar failures. Montana Power, he said, “sold their souls to become 100 percent aligned with the shareholders.” Pacific Power sold out and went to Australia to develop wind power. When things were failing, Owens said, it did not pull back-“it expanded to Phase II of wind power for $160 million, similar to Highwood II. It speculated with customers’ money.” California stopped buying power and the market dropped, leaving it $360 million in debt. Owens was optimistic with the co-ops united in opposing the reorganization. He said the bankruptcy judge’s comment to the trustee, “It is very troubling to me that four named utilities are not in favor of your plan,” meant, “That dog don’t hunt!” Kavulla distinguished the bankruptcy of a public co-op from for-profit businesses. “It is not a typical bankruptcy.

A co-op has a special relationship with the people it serves. It gives people services they can’t live without in this day and age. There should be a greater consideration of the public interest. Frankly, I’m not seeing it. It’s very strange to force someone to be in business. It’s twisted.” The BEC lawsuit claims that Southern co-op members must guarantee Morgan Stanley’s position. It argues USDA Rural Utility Service (RUS) has a priority position regarding BEC’s and other plaintiffs’ assets; that RUS is required to approve any pledge of collateral by the plaintiffs and power supply contracts and amendments thereto with a term of over two years entered into by plaintiffs. RUS has not approved rate increases after 2007 as required (rates increased 43.7 percent 2007-2009). It claims a failure of consideration when the court terminated the Yellowstone Valley and Great Falls’ Electric City supply contracts, making plaintiffs’ supply contracts unenforceable. It also claims the contracts unassignable/unassumable on various grounds.

“We will be going back to RUS to talk in detail,” said Boyd. The trustee filed a request to examine Boyd representing BEC. She will continue to keep members informed. At the Tuesday, Sept. 24, hearing the four coops said they would file an alternative plan. BEC is planning town hall meetings. Boyd promised members, “You will all be involved in the decisions to come.”